Arrow to Expand Services for ECS, Sells Some Debt

Published: October 5, 2009

by Timothy Prickett Morgan

Server and storage distributor Arrow Electronics wants its Enterprise Computing Systems (ECS) division to get a bigger piece of the services action out there in IT Land, and has tapped a new executive to chase services along with Arrow's channel partners.

Arrow has created a vice president of worldwide services position at the ECS group, and back in February tapped Joe Burke, who has held numerous senior-level management positions within ECS for the 20 years he has been at Arrow, to take on the job of building out the breadth and depth of the ECS services portfolio.

As IBM's continuing profitability thanks to Global Services, as well as Hewlett-Packard's $13.9 billion acquisition of EDS last summer and Dell 's $3.9 billion acquisition of Perot Systems and Xerox's $6.4 billion deal to acquire Affiliated Computer Services, attest to, services are in vogue big-time in the IT industry right now. There will be more services companies acquired in the coming weeks and months, and I would not be at all surprised to see Arrow and its rival in IT and electronics distribution, Avnet, make some acquisitions of their own in services relating to their IT and component distribution operations.

At Arrow, Burke was general manager of the ECS division from 2001 through 2006, which was a bit of a rough patch, so he knows all about IT and recessions and has seen how services help tide channel partners over when IT product sales stall, as they most certainly have,

Arrow is being a little vague about its services plans at this point, but the company is trying to position itself with fast-growing markets that are appealing to budget-constrained IT shops. "As demonstrated by the recent growth in hardware-as-a-service (HaaS), software-as-a-service (SaaS), and cloud computing, the delivery model for suppliers is changing," Burke explained in a statement announcing Arrow's intent to bolster its services offerings. "Arrow ECS is working to increase our participation in these new models and how we support resellers in these areas."

Right now, Burke and his team are identifying the strengths and weaknesses of the services operations inside Arrow, finding what regions existing services can be expanded globally, and starting up a managed services business of its own that resellers will be able to peddle. The areas that Arrow are looking into for managed services with the ECS brand include email defense, hosting, network management, and security; the company started up security and hosting services earlier this summer. The company also resells maintenance and warranty support on behalf of its suppliers and already offers training, education, and engineering services as professional services.

"Arrow ECS is carefully assessing additions and enhancements to our services portfolio that align with our value model and are scalable," Burke says. "Overall we are attempting to grow all of these segments organically and are opportunistic when it comes to acquisition possibilities."

Services is not a huge business at Arrow's ECS division, at least not yet, with just over $1 billion in services revenues in 2008, but this is a pretty big business when you consider that ECS only accounted for $5.4 billion in sales. (More than two-thirds of the $16.8 billion in total revenues at Arrow in 2008 came from electronics component distribution.) It will probably be a long time before Arrow can grow its services distribution business to rival the more than $4 billion in server, storage, networking hardware and various systems and application software sales that Arrow did in 2008.

In 2009, and probably for the foreseeable future, if you want to make acquisitions, you have to have cash these days, because cash--and pretty much only cash--is king. As the June quarter ended this year, Arrow had $908.4 million in cash and equivalents, but also had $1.2 billion in short-term and long-term debt. (Most of it is long-term.) So thanks to the meltdown, which has whacked Arrow's revenues as it has for all IT distributors and vendors, it doesn't really have a lot of cash on hand.

Presumably to help get its balance sheet in a position to do some acquisitions, Arrow offered to pay cash for $200 million in senior notes that were to come due in 2010. And more importantly, the company has priced out $300 million in new notes due in 2020, which will be used to pay off the $200 million in notes mentioned above with $100 million minus banker's fees left over. That's not a lot of cash, and it is not clear if Arrow will just keep in on the balance sheet or use it to fund services acquisitions for its ECS division.

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